Notes

Cap Table Modeling Exercise
CAPTAIN SIMULATORS: Modeling your Cap Table is a critical part of making a great first impression on potential funders. This will help you build a solid foundation for your cap table and help you to impress future funders with your skills. So what are you waiting for? Get started modeling today!

Template: Using this cap table modeling template, you can models out how prospective funding rounds will effect your cap table in terms of your initial investment. There's a useful YouTube video below, where each term sheet is shown separately, and walk through the factors behind each one. Each term sheet also has a summary of why it's less-expensive or more-expensive than the other terms. You can also look at the portfolio to get a better idea of the investment mix.

Term Sheet Set Up: In this cap table modeling exercise, you'll set up the initial funding rounds of your business in terms of your investment capital. The first step is to identify your target market. From this, you will develop terms and formulas to analyze the market to determine the "lookback period" for each round of funding. Your purpose here is to figure out what your long-term and short-term goals are for your business, so the numbers you come up with from this exercise should be representative of both.

You'll then need to set up your startup capital requirements. This is pretty standard for most startup cap tables. From here, you'll have a variety of decisions to make about how much money you need for your start-up costs, and other operating expenses for your company. Some start-ups may require annual contracts while others may not; if you're starting a limited liability company ( LLC ), for example, annual contracts are a must. All these decisions should be made before you run out of capital.

Next, comes convertible debt and capital notes. In your cap table modeling exercises, you should note that there are different types of convertible debt. Some convertible debt is based on the equity of your business while others are based on tangible assets. Once again, note which ones your potential investors prefer. Once all the convertible debt requirements are determined, your model should move forward.

Next, you move into the equity round. In this round, you note that the valuation of your business is going to take place in two different places. First, your existing investors will sell their shares of the company to you. In this case, the exercise price is equal to the market price of your shares. Second, during the valuation process, your existing investors will purchase a portion of your business.

Finally, we move into the cash and equity rounds. In this section, you create a cap table for selling shares of company stock. For this template, note that most investors prefer buying company stock in the open market. You should note that if this is the case, then your assumptions about the costs of investment should be modified accordingly.

With these assumptions in place, the last step is to determine whether or not you should include the assumption of liquidation preference in your cap table model. The assumption of liquidation preference assumes that the shares of stock that your startup receives will be issued in an open market. This is an important assumption because if you are going to issue company stock through an initial public offering ( IPO ), it will most likely be sold to investors in the secondary market. However, if you are going to use an indirect route, such as an acquired business from another firm, then you should note that there is a good chance that the shares will be issued under the trading securities rules of the secondary market.
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